Compliance

After almost eight years and several false alarms, the IRS may finally issue the new Section 457(f) regulations addressing nonqualified deferred compensation plans and severance plans. Two IRS attorneys speaking at separate events have expressed hope that the regulations will be released by this summer.

Credit unions at greatest risk of having to modify their plans are those that sponsor:

Nonqualified deferral plans that use noncompete restrictions as substantial risks of forfeiture, and

Severance plans providing severance benefits greater than two times compensation.

For other credit unions, the new regulations may be a non-event.

What Should Your Credit Union Do Now?

While awaiting the new 457(f) regulations, credit union boards and management can determine whether the credit union sponsors 457(f) plans that use noncompetes or elective deferrals, and whether it has promised severance greater than the two-times limit.

Having identified such plans, the credit union (and its advisers) will quickly be able to determine if and how the new rules impact the credit union’s arrangements and what, if any, changes are required.

Understanding the Tax Implications of 457(f) Rule Changes

In 2007, the IRS first announced its intent to change the 457(f) rules. If the rules are issued as the IRS anticipated, elective deferrals and deferrals subject to noncompete restrictions would no longer defer taxes. Instead, taxes would be deferred only if the deferrals were non-elective and subject to cliff vesting (i.e., the benefit is forfeited if the executive quits before the specified vesting date).

Most credit union 457(f) plans already use cliff vesting, and elective 457(f) deferrals are rare. Therefore, we expect few credit unions to have to modify their 457(f) plans.

The guidance is also expected to address what qualifies as a bona fide severance benefit for purposes of 457(f). Compensation paid under a bona fide severance plan would be taxed as received. Compensation in excess of the bona fide severance limits would be taxed in a lump sum at termination.

We expect the bona fide plan limit to be the lesser of two times the executive’s annual total compensation or two times the qualified plan compensation limit (two times $265,000 in 2015). Credit unions can still pay severance in excess of the two times limit, if fair and reasonable, but the taxation may be different.

As with 457(f) plans, we expect that few changes to severance plans will be required to comply with the new rules.

For noncompliant 457(f) or severance plans, we expect the new rules to provide a process for transitioning to compliant designs. Grandfathering of noncompliant arrangements seems unlikely.

What Should Your Credit Union Do When the IRS Issues the Guidance?

After the IRS issues the new 457(f) guidance, and especially if it expands the guidance beyond what is expected, your credit union should check with its advisors to make sure you address any modifications to your nonqualified deferral or severance plans that may be required at that time.

Burns-Fazzi, Brock (BFB) is the NAFCU Services Preferred Partner for Executive Compensation and Benefit Consulting. Burns-Fazzi, Brock engages the law firm of Sherman & Patterson to advise on regulatory and tax compliance matters. Sherman & Patterson, located in Minneapolis, MN, has consulted with and represented tax-exempt organizations with their executive compensation needs for the past 30 years. They work closely with NCUA and state credit union regulators, and frequently write and present on these topics.

Our annual competition, the Preferred Partner Innovation Awards, recognizing outstanding innovations that help credit unions thrive in an increasingly saturated financial services market has opened for entries. Entries must be submitted by Tuesday, April 14, 2015.

This year’s solutions will be judged by a committee of industry trade journalists, credit union executives, and marketing professionals. Randy Smith of CUInsights.com, a leading source for connecting the credit union community to vital news and information, will be one of this year’s distinguished judges.

“Recognizing solutions that strengthen credit unions and satisfaction among their members provides incentive for others to innovate within the credit union space,” said Randy Smith, Co-founder and Publisher of CUInsight.com. “I’m excited about helping select this year’s winners to spotlight products and services that ensure the continued success of credit unions.”

Since their inception, the Preferred Partner Innovation Awards have honored many partners who have leveraged the power of their resources to solve challenges in the credit union industry. Join us at NAFCU’s Annual Conference and Solutions Expo held in Montreal, Canada from June 23 – June 26, 2015 for the announcement of the 2015 award winners.

The Obama administration’s fiscal year 2015 revenue proposal would make significant changes to Roth IRAs. If implemented, these changes would make the Roth IRA a less attractive savings vehicle for many—and have a significant impact on credit union IRA programs.

The Administration has proposed “harmonizing” the required minimum distribution (RMD) rules for tax-favored retirement accounts that would—in a game-changing move—subject Roth IRAs to the same RMD rules as Traditional IRAs. The proposal would require Roth IRA owners to begin receiving RMDs in the year that they attain age 70½, eliminating one popular reason for converting a Traditional IRA to a Roth IRA: to avoid RMDs. It also would diminish the amount of assets Roth IRA owners would be able to pass along to their heirs—tax free—in a Roth IRA.